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Business environment

The consumer

Consumer Profile
According to Eurostat, in 2021, the median age of the population was 45.9, the third oldest population in the world. The population is aging, since the median age was 44.3 years in 2010. Germany's population rose by 50,000 (+0.06%) between 2021 and 2022. While 13.8% of the population is under 15 years old, 64.2% is between 15 and 64 years old and 22% is over 65 years old (Eurostat, 2021). On average in 2020, households are made up of 2 people while 39.7% of households are people living alone, mostly women (Eurostat). The Federal Statistical Office (Destatis) also reports that the number of one-person households is expected to rise in the near future. The population is 49.5% men and 50.5% women (Data Reportal, 2022). It is estimated that 13.7% of German population is foreign and 77.6% of the population lives in urban areas, and the cities of Berlin Hamburg, Munich and Cologne are the most populated (CIA). Germany has one of the highest levels of education: 86% of people aged 25 to 64 have completed upper secondary education, higher than the OECD average of 79%. Moreover, the proportion of upper secondary students enrolled in vocational programmes (48.1%) is higher than the OECD average (42.5%). Among the active population, some 21.5% are working as professionals, 20.9% are technicians, 13.2% are service and sales workers, 13.2% are clerical support workers, 11.6% are craft workers, 7.1% have elementary occupations, 5.9% are plant and machine operators, 4% are managers, and 1.2% are agricultural workers (Eurostat, 2021).
Purchasing Power
According to the Word Bank, GDP per capita PPP was estimated at USD 54,844.5 in 2020. The average household disposable income per capita is USD 38,971 a year, more than the OECD average of USD 30,490 a year (OECD, 2020). Germans have an average per capita purchasing power of EUR 24,807 in 2022 according to GfK’s latest purchasing power study. Private consumption expenditure was EUR 2,507 in 2020, according to Destatis. In 2021, it was still 5% below pre-crisis level (Destatis). The Gini index is 0.31, and fits into European averages (World Bank). Wage inequalities between men and women have been decreasing since 2014. According to Destatis, women in Germany earned 18% less than men in 2021. The earnings difference between men and women, the unadjusted gender pay gap, remained unchanged compared to the previous year. Women earned an average EUR 19.12 per hour in gross terms, that is EUR 4.08 less than men (EUR 23.20). In addition, the risk of poverty rate is higher for women, over 65s and non-Germans. In total, 24% of the population is at risk of poverty or social exclusion (Destatis).
Consumer Behaviour
Germany is a mass consumer society. Before making a purchase, beyond the price, German consumers like to learn as much as possible about other similar products, features, provenance etc. According to some studies, German consumers are among the most demanding in the world. Some consumers are willing to pay more for a better quality product. After dropping during the Covid-19 pandemic, consumer confidence increased in 2021, thanks to falling Covid-19 infection incidence rates and relaxed restrictive measures (HDE). It deteriorated again in 2022 in the context of the war in Ukraine. Online shopping has become the norm in Germany and the country is Europe's largest online market. The Covid-19 pandemic further accentuated the digitalisation trend. Consumers are relatively open to the products of international companies. However, local, national and European products may sometimes be preferred. Germans are relatively loyal to brands if it is a quality product. About 60% of the population is willing to buy the same brand several times in this case. Social networks are a useful way to learn about products, but also in the discovery process. Comments left by other users can determine a purchase decision. However, due to concerns about data collection by companies, Germans can be passive users of social networks.

Environmental awareness is common among German consumers. This is reflected in consumption, with the development of organic products, vegan, using little energy etc. In addition, local product consumption attracts some consumers who are willing to pay more for it. The second-hand market is very widespread in Germany, especially in the big cities, for economic, ecological and social reasons. This translates with the purchase in fripperies, second-hand stores but also with online exchanges. The collaborative economy is widely developed, both with VTC platforms, apartment rentals and carpooling.
Consumer Recourse to Credit
Germany is a country where cash payment is widespread. Debit cards are used and widely accepted, although there are places where only cash is accepted. Credit cards are less common and may be refused in some establishments such as small shops, restaurants and hotels. Household debt to GDP is down in Germany (52.5% of GDP in the second quarter of 2018). Debt is composed of long-term debt (real estate), which is rising, and short-term debts (consumer loans) which are declining. The Germans have about 760 euros of debt per person in 2018. The level of household debt is relatively low compared to other European countries with real estate debt being lower and therefore consumers need for less loans. The majority of loans are provided by banks and traditional banking providers. Loans are used to finance housing, white goods (refrigerators, washing machines, electronic products). The trend should continue in 2019, with an increase in mortgage loans but a slowdown in consumer credit. In the second quarter of 2018, German households contracted 11.8 billion euros of new loans.
Growing Sectors
Leisure and culture, education services, vehicles, catering services, accommodation services, telephony, dishes and household utensils, garden equipment, audio-visual equipment, food and footwear.
Consumers Associations
VZBV , Federation of German Consumer Associations
 TEST , Product Testing Foundation
 Verbraucher , Consumer Initiative
 

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Importing & Distributing

Import Procedures
Import procedures are subject to a declaration on-line or on paper. You will find further information on the German Customs Authority website.

The official model for written declarations to customs is the Single Administrative Document (SAD). The SAD serves as the EU importer's declaration.  It encompasses both customs duties and VAT and is valid in all EU Member States.

As part of the "SAFE" standards advocated by the World Customs Organisation (WCO), the European Union has set up a new system of import controls- the "Import Control System" (ICS)- which aim to secure the flow of goods at the time of their entry into the customs territory of the EU. This control system, part of the Community Programme eCustoms, has been in effect since 1 January 2011. Since then, operators are required to fill out an Entry Summary Declaration (ENS) to the customs of the country of entry, prior to the introduction of goods into the customs territory of the European Union. The EU recently introduced a new import control system called ICS2 to implement the EU customs pre-arrival security and safety programme.

Non-agricultural goods entering EU territory must adhere to customs formalities (ENS). This declaration must be carried out by the person bringing the goods to the territory. The Summary Declaration can be made electronically or on a form provided by the customs authorities. The deadline for lodging the ENS depends on the mode of transport carrying the goods.

Since July 1, 2009, all companies established outside of the EU are required to have an EORI number if they wish to lodge a customs declaration or an Entry/Exit Summary declaration. Once a company has received an EORI number, it can use it for exports to any of the 27 EU Member States.

Goods in transit only need a single EU transit document.

Inward processing is free of customs treatment. This procedure allows raw material (non-Union good) to enter temporarily without customs fees if it will be processed (or repaired) and re-export the finished products out of the EU territory. In this case, the importer gives a guarantee (from an insurance company or bank) equal to the amount of customs duties that would have been due on the imported raw material. This guarantee will be reimbursed when the final product is exported. This process also applies to goods planned to be re-exported. Only goods sold in the EU market are eligible to import duty and taxes.

For outward processing, duties and taxes apply only to the value added during the process. Only firms located in Germany or in the EU may take advantage of this measure.
Check the website of the EU Customs Union periodically for updates.
Specific Import Procedures

The Union Custom Code - adopted on 9 October 2013 as Regulation (EU) No 952/2013 - Title V provides for the following customs simplifications:

  • Simplified declaration (Article 166 UCC)
  • Centralised clearance (Article 179 UCC)
  • Entry in the declarant's records (Article 182 UCC). This type of customs declaration is not allowed for all customs procedures (e.g. exclusion of transit).
  • Drawing-up of customs declarations for goods falling under different tariff subheadings ( Article 177 UCC)
  • Self-assessment (Article 185 UCC)
Distribution channels
With more than 84 million inhabitants, the German market is the largest in European Union with one of the highest income in the world. The measures put in place in the context of the Covid-19 pandemic strongly impacted German consumers. Price adjusted household final consumption expenditure was 0.2% lower in 2021 than in 2020, and down 5% from the pre-crisis level of 2019 (Destatis).

After growing by 5.7% in 2020, retail turnover increased by 2.9% in 2021, reaching a new record (Bundesbank). However, parts of shop-based retail trade, such as retail trade in textiles, clothing, footwear and leather products, suffered losses in turnover during the pandemic (Destatis). Traditional department stores were negatively impacted by the pandemic, whilst online shopping increased significantly. E-commerce increased by 14% in 2021, and generated a revenue of USD 109 billion (ecommerceDB). Online grocery shopping, which was still a niche market in 2019, showed the highest growth in e-commerce in 2020, with sales increasing by 60% (USDA). The boom in internet and mail order trade continued after shops reopened. Online trade turnover increased by 36% during May-September 2021 compared with the same period in 2019 (Destatis).
The German retail food market is characterized by consolidation, market saturation, strong competition and low prices, although there has also been a consumer preference towards smaller grocery formats, including convenience stores, small grocery retailers and independents. In this way, all major grocery retailers have been investing in modernizing their existing stores to fit with this new trend. The top four retail groups together (Edeka-Group, Rewe-Group, Schwarz-Group, Aldi-Group) account for around 74.5% of the revenues (USDA). While Germans are very price sensitive in general, many wealthy consumers are looking for premium quality products and are willing to pay a higher price.
The growth of discount stores is slowing down due to market saturation, while sales in supermarkets are increasing. During the pandemic, supermarkets recorded the best performance in terms of revenue growth among all retail channels. This underlines the growing trend towards small, quick but high-quality grocery shopping in the cities, as well as the new shopping behaviours developed by consumers spending more time at home. Thus, the rise of smaller grocery formats has hampered growth of hypermarket sales. Although, hypermarkets are still widespread amongst consumers in rural or suburban areas due to their convenience and attractive prices.
Distribution market players
According to Euromonitor, the German distribution structure is characterised by:

  • the high level of consolidation of the market
  • the large number of small independent shops
  • the sector's low level of concentration (as compared with the main European markets such as France, the United Kingdom and Belgium)
  • the predominance of distribution in city centers and urban areas
  • small number of "hypermarket" style stores, mainly in the suburban and rural areas

According to the German Retail Business Federation, in 2020 specialty stores represented 16.4% of total retail trade market, followed by discount stores (15.4%), specialised chain stores (14%), traditional supermarkets (11%), hypermarkets (11%), department stores (1.7%)

According to USDA, the four leading German distribution groups are Edeka, Rewe, Schwarz Group and Aldi, which together held 74.5% of value sales in 2020 (latest data available). The rise of discounters such as Lidl or Aldi has forced distributors to wage a price war. As a result, narrow profit margins may slow down the modernisation of sales outlets and the development of new distribution concepts. Other online food retailers in Germany are Amazon, getnow and Picnic.

Retail Sector Organisations
German Retail Business Federation (German only)
 Foreign Trade Association of German Retailers

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Operating a Business

Type of companies

Gesellschaft mit beschrankter Haftung (GmbH): limited liability company
Number of partners: No minimum: one or more partners.
 Capital (max/min): EUR 25,000 minimum with at least half fully paid up at the creation of the company.
 Shareholders and liability: Liability is limited to the amount of capital contributed by all shareholders.
Aktiengesellschaft (AG): public limited company
Number of partners: No minimum: one or more partners.
 Capital (max/min): EUR 50,000 minimum with at least one quarter fully paid up at the creation of the company.
 Shareholders and liability: Liability is limited to the amount of capital contributed by all shareholders.
Offene Handelsgesellschaft (OHG): general partnership
Number of partners: Minimum: two; no maximum.
 Capital (max/min): No minimum capital.
 Shareholders and liability: Liability is joint and indefinite on the obligations and debts of the company.
Kommanditgesellschat (KG): limited joint-stock partnership
Number of partners: Minimum: two; no maximum. There are two types of partners: active partners and silent partners.
 Capital (max/min): EUR 50,000.
 Shareholders and liability: The liability of active partners is personal and indefinite. The liability of silent partners is limited to the amount of capital contributed.
 
Setting Up a Company Germany OECD
Procedures (number) 9.0 5.2
Time (days) 8.0 9.5

Source: Doing Business - Latest available data.

 

Cost of Labour

Minimum Wage
Starting from January 2022, the statutory minimum wage is set at €9.82 per hour. Starting from July 2022, the statutory minimum wage will be set at €10.45 per hour. The federal minimum wage applies to almost all employees, including foreign workers, part-time workers, interns (under certain conditions) and people working through a probationary period.
Average Wage
Average annual wage: $ 53,745  (source: OECD, 2020 - latest available data).
Social Contributions
Social Security Contributions Paid By Employers: In total, the employer's share of social insurance contributions amounts approximately 20.5% of employee's gross wages:

•    Pension (9.3%),
•    Health (7.3%),
•    Unemployment (1.2%),
•    Nursing care (1.525%),
•    Accident insurance (varies depending on the industrial sector and accident risk),
•    Insolvency (0.12%).
Social Security Contributions Paid By Employees: Social security contributions are generally shared equally by employer and employee. Employees pay approximately 19.3% of gross wages:

•    Pension (9.3%),
•    Health (7.3%),
•    Unemployment (1.2%),
•    Nursing care (1.525%).

 

Intellectual Property

National Organisations
The organisation responsible for the protection of intellectual property in Germany is the Deutsches Patent- und Markenamt (DPMA).
Regional Organisations
For patent protection: The European Patent Office.
Governing trademarks, designs and models: the European Union Intellectual Property Office
International Membership
Member of the WIPO (World Intellectual Property Organization)
 Signatory to the Paris Convention For the Protection of Intellectual Property
 Membership to the TRIPS agreement - Trade-Related Aspects of Intellectual Property Rights (TRIPS)
 

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Tax Rates

Consumption Taxes

Nature of the Tax
Value Added Tax (VAT), also refered to as Umsatzsteuer (USt) or Mehrwertsteuer (MwSt).
Tax Rate
19%
Reduced Tax Rate
Goods and services subject to a 7% tax rate include (e-)books and (e-)newspapers, cultural services, food, passenger transport (under specific conditions), agricultural products, hotel stays, and the supply of gas through the natural gas network and heat via a heating network for the period from October 1, 2022 (retroactively), to February 29, 2024.
Intra-EU supplies, exports to non-EU countries, and cross-border transport of goods to and from non-EU countries are generally zero-rated.
Other Consumption Taxes
Germany levies several environmental taxes, including those on mineral oil, gas, coal and electricity. A motor vehicle tax is imposed on the ownership of motor vehicles.
General insurance premiums also incur a 19% tax.
Excise duties apply on fuel, electric power, alcoholic products and tobacco.
There are no stamp duties in Germany (except for the real estate transfer tax).
 

Corporate Taxes

Company Tax
Standard rate is 15% (15.825% including a 5.5% solidarity surcharge). Effective rate including trade tax (assessed independently by each municipality from 7% to 17%) is estimated at about 30-33%
Tax Rate For Foreign Companies
Resident and non-resident companies are subject to the same tax treatment. A company is resident for tax purposes in Germany if it is effectively managed or if its place of incorporation is in Germany.
The German law (in line with OECD's provisions) defines a permanent establishment as any fixed business facility serving the corporate purpose.
Capital Gains Taxation
Capital gains are typically taxed at the same rate as ordinary income at 15% (or 15.825% with the solidarity surcharge). A 95% tax exemption (a 100% exemption with a 5% add-back as a non-deductible business expense) applies to the sale of shares by a company, regardless of how long the participation in the subsidiary has been held. Such an exemption does not apply to banks, financial institutions and finance companies, life or health insurance companies and pension funds.
Main Allowable Deductions and Tax Credits

In general, all expenses incurred in the course of business operations are deductible. Germany offers unilateral tax relief, allowing companies to credit foreign taxes paid up to the amount that is subject to domestic tax or to deduct foreign tax as a business expense. Net operating losses up to EUR 1 million can be carried back one year for corporation tax (for losses incurred between 2020-2023 the limit has been increased to EUR 10 million, in response to the COVID-19 crisis), but this provision does not apply to trade tax. Losses can be carried forward indefinitely and deducted up to a total income of EUR 1 million without limitation. For losses exceeding this amount, the excess can be deducted up to 60% of the total income. However, from 2024 to 2027, this limit is temporarily increased, allowing excess losses to be deducted up to 70% of the total income. Deduction of net interest expense is generally limited to 30% tax EBITDA.

Start-up and formation expenses are deductible. Bad debts incurred on business activity with unrelated parties are deductible if it is apparent that they are irrecoverable and all attempts to pursue the debt have failed or been abandoned.

Donations to charity organizations that respect certain parameters, whether in cash or in kind, are deductible up to the higher of 20% of otherwise net taxable income or 0.4% of the total of sales revenue and wages and salaries paid during the year.

Paid taxes are deductible, except for corporation tax, trade tax, and the VAT on most non-deductible expenses. Fines and penalties are not deductible. The deductibility of certain royalty payments to related parties has limitations. Payments to foreign affiliates can be deducted, provided the amounts are at "arm’s length".

According to the German Research Allowance Act (Forschungszulagengesetz), a tax-free subsidy of 25% of salaries and wages for certain R&D purposes shall be guaranteed up to a limit of EUR 1 million/year (until 30 June 2026). Furthermore, the maximum assessment basis for eligible expenses incurred after March 27, 2024, has been increased to EUR 10,000,000. This results in a maximum R&D allowance of EUR 2,500,000 per year, or EUR 3,500,000 for certain small and medium-sized enterprises.

The straight-line method is used to calculate depreciation for both movable and fixed assets, based on the asset's estimated useful life. A depreciation table (AfA-Tabelle) established by the Federal Ministry of Finance provides the specific depreciation period for each asset. Assets with a net value below EUR 800 can be fully depreciated right away. For movable assets acquired or produced between 2020 and 2022, a temporary accelerated depreciation method utilizing the declining balance approach has been introduced. The depreciation factor applicable under this method can reach up to 2.5 times the current depreciation rates but is limited to 25% annually. Furthermore, under the recent legislative changes in the Growth Opportunities Act of March 27, 2024, movable fixed assets acquired or manufactured between March 31, 2024, and January 1, 2025, may use the declining balance method for depreciation. This method allows for a depreciation rate of up to 20% per annum, with a maximum rate of twice the straight-line depreciation rate.
Other Corporate Taxes
Municipal trade tax, an income tax levied by municipalities, has a minimum rate of 7%. It applies to all businesses with commercial activities through a subsidiary or nonresident's permanent establishment in Germany. Corporations are considered to conduct commercial enterprises regardless of their activities. The average tax rate varies between 14% and 17% of income and is based on taxable income as calculated for corporate income tax, with several adjustments.
A real property tax is levied by the municipality where the property is located, the rate includes a fixed rate based on property use and a variable municipal rate. The tax is based on the property's tax value, determined by specific valuation principles.
A real estate transfer tax applies with rates varying between 3.5-6.5%, including on indirect transfers from the acquisition of at least 90% of the shares in property-owning companies.

Employers are liable for social security contributions, as follows:

- Pension insurance: 9.3%
- Unemployment insurance: 1.23%
- Health insurance: 7.3% (the health funds may levy a supplement of 1.7% on average)
- Invalidity insurance: 1.525% (with a surcharge of 0.35% for employees without children)
- Statutory nursing care insurance: 1.7%

In 2024, pension and unemployment contributions are capped at monthly salary limits of EUR 7,550 in Western Germany and EUR 7,450 in Eastern Germany. Health and invalidity insurance contributions are capped at EUR 5,175 per month across both regions.
The insolvency contribution, payable solely by the employer, is set at 0.09% of income, capped at EUR 84,600 annually (EUR 81,000 in the new federal states).

Other Domestic Resources
Federal Central Tax Office
 

Double Taxation Treaties

Countries With Whom a Double Taxation Treaty Have Been Signed
Federal Ministry of Finance
Withholding Taxes
Dividends: 25% (26.375% with solidary surcharge)
Interest: 0/25% (26.375%, including the solidarity surcharge; generally only interests on publicly traded debt, interest received through a German payment agent, convertible bonds, and certain profit-participating loans)
Royalties: 0 for residents/15% for non-residents (15.825% with solidarity surcharge)

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